Life After “The Merge”: Can Crypto Go Green?

Sugi’s Josh Gregory argues that saying crypto going truly green – for the moment – may be wishful thinking.

Image source: Shutterstock

Many see crypto’s environmental footprint as one of its biggest failings. But changes are underway. Last week, the crypto world was abuzz when Ethereum, the second largest cryptocurrency by market capitalization, upgraded to a more environmentally friendly production method (known as “Merge”), which should mean 99.99 percent less carbon emissions.

So some are starting to ask, is crypto now really “green”?

As a background, the original crypto algorithm, ‘proof of work’, is incredibly energy intensive. Ethereum, which is also used by other blockchains and decentralized apps, has moved to proof of stake, which operates in a much more energy efficient way. This should immediately lead to a significant reduction in the overall emissions from the crypto ecosystem.

But not so fast. There are two major issues that mean crypto will struggle to rebrand itself as green.

First of all, bitcoin, by far the largest cryptocurrency, is still created and transacted using the energy-intensive proof of work algorithm. It’s baked in as part of bitcoin’s core functionality; it’s not going to change. And mining bitcoin has a huge footprint. Some estimates put it at 191 tonnes of carbon per bitcoin – the equivalent of cutting down 13,000 trees. Every day, the bitcoin network uses as much energy as Norway.

For the environmentally conscious bitcoin investor, there are a few options to reduce this footprint. Crypto Climate Accord, an industry body founded in 2021, encourages mining to use more renewable energy, and soon you will be able to look for bitcoins marked as such. It is also possible to purchase carbon credits to offset the footprint of your bitcoin portfolio, either separately or as part of the bitcoin purchase itself.

This brings us to the second, more systemic problem. The environmental footprint of crypto is calculated in a limited way that does not take into account important indirect emissions that are increasingly included when calculating the effect of other types of investments.

What does that mean? We conventionally assess a company’s carbon emissions using three different “scopes”, or to put it another way, using three increasingly large circles. This is Scope 1 (the emissions a company creates when it produces things); Scope 2 (the emissions from the electricity suppliers); and Scope 3 (the emissions from all its suppliers and all possible users of the products). Scope 3 is often by far the largest proportion.

Although no one would argue that crypto is a corporation, its production and use have important indirect consequences, which should not be ruled out. In fact, the Crypto Climate Accord suggests treating crypto as a corporation when considering its impact.

Let’s use the example of bitcoin. Scope 1 emissions are negligible, as bitcoin is not physically “mined” in the same way as other commodities. On the other hand, Scope 2 emissions can be huge, covering the huge amount of electricity used by servers and air conditioning in a mining rig.

And then there is Scope 3, most of which is never assessed.

Who are the “providers” of bitcoin?

Well, the computers that mining groups use, for one thing. These pieces of equipment can have long, complex supply chains, with components assembled across the globe, including rare earths mined in hard-to-reach locations. And because bitcoin, by design, requires miners to solve increasingly difficult mathematical problems, computers and their components often have to be discarded and upgraded.

What about downstream use? Bitcoin is not “used up” as a conventional commodity or product, but it certainly has an extended life, and is part of perhaps thousands of secondary transactions validated by the mining network, each of which can emit up to 500 kg of carbon.

Finally, we can look at the centralized exchanges, such as Coinbase, where many crypto enthusiasts keep their wallets. These have their own carbon footprints from servers, electricity, air conditioning, etc. They are a significant part of the crypto network and ignoring their footprints would be negligent.

In the ordinary investment world, we talk about greenwashing. There is potential for that here as well.

Of course, bitcoin’s extreme and very public carbon footprint should not hide the fact that the regular banking system also has a footprint: all the stuffy bank branches, rooms full of servers to manage online banking, and even mining metal to produce coins.

Due to Ethereum’s core position in crypto and the larger blockchain ecosystem, the merger will likely make a difference to crypto emissions. And this may be enough to persuade some institutions to go off the fence when it comes to investment.

But talk of truly green crypto may be – at the moment – ​​wishful thinking.

The views and opinions expressed are not necessarily AltFi’s.